Effects of German inflation on accounting records

1

THE EFFECTS OF GERMAN INFLATION ON
ACCOUNTING RECORDS
by
Walker Fesmire
University of Michigan-Flint
During the 1920's the German economy
suffered through a terrible period of inflation.
The rate of German inflation was so rapid that
during the month of October 1923 only, the
purchasing power of a paper mark fell from 1.0
on October 5th to 0.008 by October 31st.
During the 1920's, Henry W. sweeney was
attempting to develop a model for the U.S.
which would handle accounting for changing
prices. In preparation for the development of
his model, Sweeney reviewed the German
inflationary experience to determine the
weaknesses of the German system.
Sweeney found several weaknesses in the
German system and he detailed several
difficulties that arose for accountants during
that period. He also noted the undesirable
effects that the breakdown had upon the
Germans and German society.
Sweeney listed the weaknesses that he found
in the German system as follows:
1. The book figures became dissimilar with respect
to the equivalent value of the unit in which
they were expressed. A monetary amount of
one month could not be properly compared
with an amount in another month because the
valuation unit in which the amounts were
expressed (the mark) was generally worth much
less in the later month.
This first effect, he decided was probably the
basic cause of all the succeeding ones in a
period of monetary inflation.
2. Calculations of profit and loss became incorrect.
Costs and expenses in marks could not be
deducted from income expressed in marks if
true profits or losses were to be ascertained.
Hence, false profits appeared.
3. The real economic capital of the business was
not maintained. Computation of depreciation
on the basis of original cost per books was one
main cause. The result was that the amounts
reserved represented mere minor fractions of
the purchasing powers of the amounts originally
invested.
4. The accounting statements became inaccurate
and misleading.
5. The net worth of each business entangled in
the maelstrom of gyrating prices, false profits
and feverish consumption of capital tended to
show misleading increases.
6. Dividends tended to be paid from capital
inasmuch as they were based, in most cases, on
false book profits.
7. Income taxes likewise tended to be paid from
capital.
A review of the list developed by Sweeney
and a comparison of his list to recent comments
heard about changing prices reveals that the
problems and concerns of today are similar to
those of yesterday.
SOURCE: Sweeney, Henry W., "effects of Inflation
on German accounting," The Journal of Accountancy,
February, 1928, pp. 180-91.
12 The Accounting Historians Notebook, Fall, 1984